Enterprise Fixed business may surprise on the upside on bigger-than-expected government contract wins and/or earnings-accretive acquisitions.

Key developments to watch:

TPG’s service launch by year-end,

TPG’s market traction by mid-2019 and

more details on cost cuts during 3Q/4Q18 results call.

~ SGinvestors.io ~ Where SG investors share

Upgrade to ADD with a lower Target Price of S$1.85

We upgrade StarHub from Hold to ADD, with a 23% lower DCF-based target price of S$1.85 after our FY18F-20F EBITDA/core EPS cuts. This is to factor in weaker-than-expected 2Q18 results and more conservative mobile ARPU assumptions.

Down 63% in the last three years, we believe StarHub’s share price now adequately accounts for the risk of more intense competition from TPG, with potential upside surprise from cost cuts.

StarHub is trading in line with its 10-year EV/OpFCF mean in FY20-21F when earnings hit a trough. A downside risk is keener competition.

Manageable downside if ARPU falls steeper than expected

At S$31 (blend of device-bundled and SIM-only plans) in FY20F, we think it is sufficiently close to an estimated S$25-30 SIM-only ARPU needed by TPG to hit its EBITDA breakeven target in 5-6 years. If the impact is 15% p.a. (FY20F: S$28), StarHub’s fair value is S$1.42, or a potential downside of 7.9% (including dividend yield).

A more sustainable DPS could be S$0.10 p.a.

We cut FY19F-20F DPS to a more sustainable S$0.10 p.a. (previously: S$0.16), factoring in our revised earnings forecasts, 700/2100MHz spectrum payments (FY19F/21F) and buyout of the remaining stake in ASTL/D’Crypt (FY20F/21F). Based on this, StarHub’s net debt/EBITDA rises to a peak of 2.5x by end-FY21F (end-FY17: 1.0x), then eases thereafter.

StarHub may also want to keep some cash for potential M&As, in our view.

K-ost revamp will be key

During its 2Q18 results call, the new CEO, Peter K, said

there will be no big strategy shifts and

StarHub will start pursuing cost optimisation in 2H18F.

We think this makes sense as it is already rightly pursuing growth in the Enterprise Fixed business and, given future revenue pressures, must focus on cost revamp. We currently forecast service opex (ex-depreciation) to fall 3.9% between FY18F-20F.

Enterprise Fixed could surprise on the upside

We see Enterprise Fixed revenue rising 15.2% y-o-y in FY18F, boosted by ASTL (full year) and D’Crypt (11 months), then more modest 4.3%/3.9% y-o-y growth in FY19F/20F. We gather that StarHub has been successful in several government tenders recently and will vie (as part of consortiums) for c.45% of the government’s annual ICT contracts worth S$2.6bn.

The Enterprise Fixed business may surprise on the upside on bigger-than- expected contract wins and/or more earnings-accretive acquisitions.

Key developments to watch for share price

We expect aggressive promotions from TPG when it launches by year-end, which may keep sentiment on StarHub weak. Thereafter, investors will monitor competition and TPG’s market traction by mid-2019.

StarHub’s new CEO may unveil more details on cost cuts in the 3Q/4Q18 results call. A milder-than-feared impact from TPG and the delivery of material cost savings by mid-2019 would be positive for the share price, in our view.

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